Whatís a market worth? (January 2001)

With dot com failures and cold water poured on energy e-biz financial forecasts, PDM editor Neil McNaughton wonders just how much a market is worth. The answer seems to be not a lot but other business models for upstream e-business look more promising. Could it be that we have been missing some real opportunities for geophysical e-business?

While attending the IAGC e-commerce in geophysics conference in Houston this month (see report on pages 6 and 7) I am sure that I heard a couple of speakers make what amounts to an e-biz Freudian slip. This involved the classic illusion of new businesses, that of confusing turnover with profit. I heard one speaker enthuse over the Ďbillions of dollarsí that were transiting through the upstream Acquisitions and Divestiture (A&D) market, with the distinct implication that a large proportion of this was to come the way of the e-market.

London Stock Exchange

Well OK, no doubt some of it will, but how much? If x billion dollars worth of business goes through a market, what is the profit made by the marketplace? Well one rather famous marketplace, the London Stock Exchange (LSE), was up for sale recently. Although the deal was not done it did expose an estimate of the value of a marketplace. This was of the order of one billion pounds sterling. A lot, but not an astronomical amount, much less than the billions of dollars that energy e-biz is going to Ďgenerate.í

£ 6.5 trillion!

I got on the web and did some further digging, with interesting results. The LSE made some £ 34 million profit on £ 175 million turnover last year. But this of course is the turnover recorded in the LSEís books, what they charge clients for their services. Some more digging revealed the Ďturnoverí of the LSE itself. This was a staggering £ 6.5 trillion in 2000. Now mapping a stock market across to a vertical e-biz is far from a perfect fit. I would have liked to do further research on cattle, or fruit and vegetable markets, but will simply observe that the people running them donít look as though they are in the billion dollar category!

Salomon Smith Barney

If we take the ratio of the LSEís overall turnover (£ 6.5 trillion) to marketplace profit (£ 20 million) we have a rather sobering ratio of 1:325,000. For fun, lets map that across to some E&P disposal market values. A survey by Salomon Smith Barney last year put the upstream A&D market at $30-50 billion annually. Taking the upper figure, and applying the LSE ratio of market value to marketplace profit this implies profits to all the market owners of an under whelming $ 140,000.


One thing is of course wrong with this analysis. Most of the profit made in share trades is not made by the marketplace, but by the market makers - the brokerage houses. More surfing revealed that the overall commission rate for UK equity business is 0.15%. This gives a marketplace turnover to market maker turnover ratio of a more respectable 1:667. In other words, the E&P A&D market makerís turnover becomes $75 million. With a reasonable amount of competition, well run businesses could be expected to translate this into profits of the order of $10 million. Still rather a modest figure for the world-wide A&D market.


Similar fundamentals have been behind the failure of many dot coms recently. A propos of this, Schlumberger CEO Euan Baird comments ďAs the dot.com technology bubble fades it is becoming increasingly clear that the winners in the Internet age will be companies with excellent products and market shares in specific verticals who are able to aggressively enhance their business model with these new technologies.Ē Indeed, if you have a business like Schlumbergerís you should indeed be able to leverage it through the internet. But for the rest of us, is the internet just a technological veneer around traditional activity? Or are there still opportunities for quantum change and completely new businesses?

ĎProcessiveí interpretation

In my own modest contribution to the IAGC proceedings I argued that there were indeed lots of such opportunities emerging. For geophysics, many of these will apply to the frayed boundary between Ďprocessingí and Ďinterpretation.í I ventured that bandwidth could provide much greater integration between your unstacked, off-site data and your interpretation workstation. That there was a real opportunity here to provide a multitude of new services such as pre-stack depth migration on demand, AVO, rapid access to partial gathers and management of such complex datasets. All facilitating a move from interpretive processing to Ďprocessiveí interpretation.

Cap Gemini

Randy Alexander of Cap Gemini Ernst & Youngís analysis of transaction types was interesting in this context. Most all of the portal, procurement and marketplace type business falls into the low margin area of e-commerce. It also requires multi-party agreement on the standards and protocols to be used - which historically has proved hard to reach. On the other hand, the high tech, bandwidth-enabled processes fall into the attractive high added value category. But what is even better, you only need standards and protocols agreement between the contractor and the client to get up and running. Could the integration of high tech processing into the interpretation workflow be the real low hanging fruits of geophysical e-business?ź

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